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The risks of zero-subsidy offshore wind

IN DEPTH | Dong and EnBW say that the 1.38GW of subsidy-free offshore wind they recently won at tender will be profitable — but only if certain predictions come true

The energy world was stunned in April when 1.38GW of German offshore wind was won at tender with zero-subsidy bids, meaning that the three projects will rely solely on the wholesale electricity price when commissioned in 2024-25.

The two winning utilities, Denmark’s Dong Energy and Germany’s EnBW, have not revealed their cost projections, but analysts have calculated that the projects’ levelised cost of energy (LCoE) is likely to be around €31 ($33.70) per MWh.

The news has led some to proclaim that the bids are a game-changer for the industry and will lead to a global boom in offshore wind around the world.

But the circumstances of the projects — EnBW’s 900MW He Dreith and Dong’s OWP West and Borkum Riffgrund West (both 240MW) — are relatively unique and not necessarily transferable.

Plus, the utilities have based their plans on assumptions about the future prices of electricity and carbon — as well as the future size of offshore turbines — that could prove to be wide of the mark. It is also worth remembering that it will be several years before Dong and EnBW take a final investment decision, and the penalties for abandoning the schemes are relatively small.

So what are the chances that the zero-subsidy projects will actually go ahead as planned — and be profitable?

Extreme-scale turbines

According to both Dong and EnBW, one of the reasons they could offer such low bids is that offshore turbines will have much larger nameplates by 2024-25, generating far more bang for the buck.

“If the volume [of an offshore array] is capped, in our case at 900MW, then a larger turbine decides how many locations you really need to build,” says Dirk Güsewell, the head of portfolio development at EnBW.

“And the fewer locations there are, the fewer foundations, towers and nacelles are needed.”

K2 Management analyst Simon Luby, adds: “Moving up to 8-9MW, turbines have enabled the capex cost on a per-MW basis to be reduced by more than a third compared to projects using 5-6MW machines, and in some cases, has been closer to half the cost per MW. If such cost reductions can be achieved at this scale, using turbines of up to 15GW could open the door to vast capex savings.”

EnBW has talked “very intensely” with manufacturers about their development pipelines and future generations of turbines, Güsewell tells Recharge. The company then double-checked this information against its own reverse-engineering data and cost calculations before making its bid.

Dong likewise expects turbines of 13-15MW to be available by 2024.

“We have inside information into what the OEMs are doing, but we are not allowed to comment on that, we are bound by non-disclosure agreements,” Samuel Leupold, the head of Dong’s offshore wind unit, told Recharge during a recent interview in Brussels.

In 2014, Siemens said they were planning to build a 10MW model by 2020; and in 2015, the company’s head of offshore wind, Michael Hannibal, revealed to Recharge that it could be much larger. “We don’t call it a 10[MW], we call it a 1X[MW], because we do not know how big that X will be,” he said.

Since then, the OEM — now Siemens Gamesa Renewable Energy (SGRE) — has kept its cards close to its chest, pointing to the fact that it will only start serial production of its 8MW offshore machine this summer.

“And of course we look at a future offshore turbine platform in order to drive the industry forward.

[But to reveal] an exact launch date is way too early,” SGRE chief executive Markus Tacke tells Recharge. “The zero-bid projects in Germany that are being discussed are to be installed from 2024 onward. There is still time to improve and develop the technology that will be deployed in those projects.”

Tacke also says it is too early to decide what SGRE would do with the Adwen 8MW platform that it inherited from its recent merger with Gamesa, only that future offshore models would combine the best of Siemens’ and Adwen’s technology.

SGRE’s closest offshore rival, MHI Vestas, which has recently beefed up its 8MW turbine to 9MW, is even more secretive.

Chief executive Jens Tommerup tells Recharge that the manufacturer’s journey of technical upgradings will continue, but refuses to go into specifics.

“We still have a very strong technology platform which we are further improving and developing on all the time,” he says. “Commenting on our long-term pipeline, we will not do. But we are very confident that we will stay competitive in the market and be a market leader looking forward.”

The other two Western offshore turbine makers, Senvion and GE, seem way behind the curve, currently only offering 6MW-class machines. Both have admitted that they will need larger-capacity models to compete in European offshore in the future, but have been vague about their plans.

Despite all the secrecy, BMI Research analyst Daniel Brenden believes it is feasible for 13-15MW machines to be on the market by 2024-25.

“In offshore wind, we’re not talking just about Europe, but also the US and Asia. So it makes much more sense to be the first ones to develop these big turbines,” he says.

Power and CO2 prices

Perhaps an even bigger gamble by Dong and EnBW is that wholesale electricity prices in Germany will be high enough to generate a profit from their zero-subsidy projects.

German wholesale spot prices currently hover between €30 and

€40/MWh, but on days when renewable energy is oversupplied, that figure can reach zero and even cross into negative territory.

However, power prices are expected to increase in the coming years due to several factors. By the end of 2022, Germany will have shuttered its remaining 11.4GW of nuclear capacity. And on top of that, several fossil-fuel-fired power plants will have to close due to climate protection measures.

"It is, of course, a gamble — on the future of wholesale electricity prices, and on the continued evolution of the technology — but one which these companies are obviously willing to take"

But not everyone is convinced that these developments will be enough to push power prices into the levels needed by Dong and EnBW.

“The bidders assume that electricity wholesale prices will rise considerably. But that will only happen if coal-fired power plants, of which there are too many currently, exit the market, and certificates for greenhouse-gas-emissions rights become more expensive,” he tells Recharge.

If the EU does not take effective measures to prop up prices in its emissions trading system (ETS), the utilities are unlikely to build the projects, says Graichen. Dong and EnBW would then be liable for penalties of €48m and €90m respectively. As large state-backed utilities, both could stomach such a loss without too much trouble.

Nevertheless, Dong and EnBW are clearly confident in their calculations.

EnBW says it has developed several power price scenarios, including some that take CO2 prices into consideration, and then came up with an average price scenario for its investment plan.

“If we compare our electricity price assumptions with data from commercial data providers available in the market, then our electricity price expectations are rather conservative,” says Güsewell, echoing similar statements made by Dong.

But experts say that even if the utilities’ calculations prove to be right, the projects might not be very profitable.

“Assuming average wholesale electricity prices of €35/MWh after 2020 and an LCoE of about €31/MWh, EnBW’s He Dreiht may end up with an IRR [internal rate of return] of about 6-7%,” says MAKE analyst Andrea Scassola.

Berlin-based consultancy Energy Brainpool is more optimistic, believing that the utilities could garner an average price of around €53/MWh in 2025 and up to €76/MWh by 2035.

Low costs will pave the way for US offshore wind: Dong

“I find it difficult to believe that people can [make such an investment] unless there is some way their income isn’t dependent on a wholesale market that will fall through the floor every time theirs and other wind fleets generate at the same time,” says Gordon Edge, director of Inflection Point Energy Consulting, who was previously director of policy at RenewableUK. He believes that the utilities and their investors will probably need a greater guarantee that their future income will be sufficient, such as power-purchase agreements (PPAs).

Leupold says Dong will explore whether corporate PPAs are an option for its zero-subsidy projects as a “de-risker”, but the Danish utility has not factored in such deals in its business case.

EnBW is also interested in PPAs, but says it is too early for concrete steps.

“It is, of course, a gamble — on the future of wholesale electricity prices, and on the continued evolution of the technology — but one which these companies are obviously willing to take,” says Global Wind Energy Council (GWEC) secretary-general Steve Sawyer. “And you can be sure they’ve analysed it in great detail.”

Scale and strategy

Dong and EnBW say they have been able to cut costs so dramatically due to economies of scale — they plan to operate these zero-subsidy projects in a cluster with nearby wind farms.

EnBW intends to bundle He Dreith with its nearby 112MW Albatros and 497MW Hohe See projects, creating a 1.5GW operational cluster.

“Not only will the operation be more efficient at this scale. The immediate vicinity of the three projects also makes joint offshore logistics possible, and to that effect one single hotel ship, one control room, one service harbour can be used for considerably more capacity,” Güsewell explains.

Dong points out that its zero-subsidy projects are next to its Borkum Riffgrund 1 & 2 arrays, which means that O&M can be carried out from the company’s existing base at the German port of Norddeich.

Both companies say that there is no cross-financing of their zero-subsidy projects with nearby wind farms that rely on relatively high feed-in tariff support.

“Each project needs to stand on its own feet. The synergies created with other wind farms have to be shared between the two projects,” says Leupold.

The bundling of projects gives the two utilities a competitive advantage, but both say their low bids were not part of a strategic plan to secure as much offshore acreage as possible and discourage competition.

More collaboration needed to keep cutting offshore wind costs

“There was no strategic premium,” Güsewell says. “Under framework conditions we have defined for ourselves, the bid is value-creating.”

Nevertheless, it is quite likely that smaller offshore players such as German developers PNE Wind or WPD will not have the financial stamina to compete against zero-subsidy bids in future tenders.

“It is a very strategic bid to fend off competition and to keep off new entries into offshore wind,” Sydbank analyst Morten Imsgard tells Recharge.

“Dong is very strong [in offshore wind], but a small company on a global scale. They fear that companies such as Shell or Statoil will participate [in offshore wind] big time. For Dong to win strategic projects, they probably needed to go all the way to zero-subsidy, as not all companies can go there.”

Some of Dong and EnBW’s major rivals have made clear that they intend to continue investing in offshore wind.

Holger Gassner, head of markets and political affairs at German utility Innogy, tells Recharge that it is good news that offshore wind in Europe is now cheaper than conventional fossil-fuel generation. But he adds that it will depend on the individual framework conditions of each auction as to whether there will be more zero-subsidy bids in the near future.

“We are convinced that we will be able to hand in competitive bids in future auctions,” he says.

Gunnar Groebler, senior vice-president and head of business area wind at Swedish utility Vattenfall, another major offshore wind player, “absolutely welcomed” the results of Germany’s first offshore auction.

“Since the very start we stated that renewable energies, and thus offshore wind, must ultimately become independent from subsidy schemes,” he tells Recharge.

Grid costs and lifespan

The idiosyncrasies of the German offshore tender system are another reason bids were able to go so low.

Developers in Germany do not pay for the grid link from wind farm to shore — this is provided by transmission system operator TenneT and financed through surcharges on consumers’ electricity bills.

“That certainly makes a difference in Germany if you compare it to the UK auction,” Leupold says.

The length of time between the bid and the expected completion date is also much longer than in other countries, which allows developers to take advantage of the larger turbines and likely higher wholesale power prices in the future, Leupold adds. “The Borssele 1 & 2 project [in the Netherlands], which we have won [with a bid of €72.70/MWh], for instance, has to be delivered by the year 2020-21, and therefore will basically much more reflect the current cost situation. But the German bid reflects the cost situation as we can see it rise over the next couple of years,” he explains.

Developers in Germany are also granted the opportunity to apply for an extension of the lifespan of offshore wind arrays from 25 to 30 years — another cost-cutting element in Leupold’s eyes.

“My only question would be ‘Why only five years?’” he asks. “Why would you want to restrict the lifetime of these assets a priori from a regulating point of view? As long as they are producing clean and reliable power, why would you want to stop them?”

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The risks of zero-subsidy offshore wind

IN DEPTH | Dong and EnBW say that the 1.38GW of subsidy-free offshore wind they recently won at tender will be profitable — but only if certain predictions come true

The energy world was stunned in April when 1.38GW of German offshore wind was won at tender with zero-subsidy bids, meaning that the three projects will rely solely on the wholesale electricity price when commissioned in 2024-25.

The two winning utilities, Denmark’s Dong Energy and Germany’s EnBW, have not revealed their cost projections, but analysts have calculated that the projects’ levelised cost of energy (LCoE) is likely to be around €31 ($33.70) per MWh.

The news has led some to proclaim that the bids are a game-changer for the industry and will lead to a global boom in offshore wind around the world.

But the circumstances of the projects — EnBW’s 900MW He Dreith and Dong’s OWP West and Borkum Riffgrund West (both 240MW) — are relatively unique and not necessarily transferable.

Plus, the utilities have based their plans on assumptions about the future prices of electricity and carbon — as well as the future size of offshore turbines — that could prove to be wide of the mark. It is also worth remembering that it will be several years before Dong and EnBW take a final investment decision, and the penalties for abandoning the schemes are relatively small.

So what are the chances that the zero-subsidy projects will actually go ahead as planned — and be profitable?

Extreme-scale turbines

According to both Dong and EnBW, one of the reasons they could offer such low bids is that offshore turbines will have much larger nameplates by 2024-25, generating far more bang for the buck.

“If the volume [of an offshore array] is capped, in our case at 900MW, then a larger turbine decides how many locations you really need to build,” says Dirk Güsewell, the head of portfolio development at EnBW.

“And the fewer locations there are, the fewer foundations, towers and nacelles are needed.”

K2 Management analyst Simon Luby, adds: “Moving up to 8-9MW, turbines have enabled the capex cost on a per-MW basis to be reduced by more than a third compared to projects using 5-6MW machines, and in some cases, has been closer to half the cost per MW. If such cost reductions can be achieved at this scale, using turbines of up to 15GW could open the door to vast capex savings.”

EnBW has talked “very intensely” with manufacturers about their development pipelines and future generations of turbines, Güsewell tells Recharge. The company then double-checked this information against its own reverse-engineering data and cost calculations before making its bid.

Dong likewise expects turbines of 13-15MW to be available by 2024.

“We have inside information into what the OEMs are doing, but we are not allowed to comment on that, we are bound by non-disclosure agreements,” Samuel Leupold, the head of Dong’s offshore wind unit, told Recharge during a recent interview in Brussels.

In 2014, Siemens said they were planning to build a 10MW model by 2020; and in 2015, the company’s head of offshore wind, Michael Hannibal, revealed to Recharge that it could be much larger. “We don’t call it a 10[MW], we call it a 1X[MW], because we do not know how big that X will be,” he said.

Since then, the OEM — now Siemens Gamesa Renewable Energy (SGRE) — has kept its cards close to its chest, pointing to the fact that it will only start serial production of its 8MW offshore machine this summer.

“And of course we look at a future offshore turbine platform in order to drive the industry forward.

[But to reveal] an exact launch date is way too early,” SGRE chief executive Markus Tacke tells Recharge. “The zero-bid projects in Germany that are being discussed are to be installed from 2024 onward. There is still time to improve and develop the technology that will be deployed in those projects.”

Tacke also says it is too early to decide what SGRE would do with the Adwen 8MW platform that it inherited from its recent merger with Gamesa, only that future offshore models would combine the best of Siemens’ and Adwen’s technology.

SGRE’s closest offshore rival, MHI Vestas, which has recently beefed up its 8MW turbine to 9MW, is even more secretive.

Chief executive Jens Tommerup tells Recharge that the manufacturer’s journey of technical upgradings will continue, but refuses to go into specifics.

“We still have a very strong technology platform which we are further improving and developing on all the time,” he says. “Commenting on our long-term pipeline, we will not do. But we are very confident that we will stay competitive in the market and be a market leader looking forward.”

The other two Western offshore turbine makers, Senvion and GE, seem way behind the curve, currently only offering 6MW-class machines. Both have admitted that they will need larger-capacity models to compete in European offshore in the future, but have been vague about their plans.

Despite all the secrecy, BMI Research analyst Daniel Brenden believes it is feasible for 13-15MW machines to be on the market by 2024-25.

“In offshore wind, we’re not talking just about Europe, but also the US and Asia. So it makes much more sense to be the first ones to develop these big turbines,” he says.

Power and CO2 prices

Perhaps an even bigger gamble by Dong and EnBW is that wholesale electricity prices in Germany will be high enough to generate a profit from their zero-subsidy projects.

German wholesale spot prices currently hover between €30 and

€40/MWh, but on days when renewable energy is oversupplied, that figure can reach zero and even cross into negative territory.

However, power prices are expected to increase in the coming years due to several factors. By the end of 2022, Germany will have shuttered its remaining 11.4GW of nuclear capacity. And on top of that, several fossil-fuel-fired power plants will have to close due to climate protection measures.

"It is, of course, a gamble — on the future of wholesale electricity prices, and on the continued evolution of the technology — but one which these companies are obviously willing to take"

But not everyone is convinced that these developments will be enough to push power prices into the levels needed by Dong and EnBW.

“The bidders assume that electricity wholesale prices will rise considerably. But that will only happen if coal-fired power plants, of which there are too many currently, exit the market, and certificates for greenhouse-gas-emissions rights become more expensive,” he tells Recharge.

If the EU does not take effective measures to prop up prices in its emissions trading system (ETS), the utilities are unlikely to build the projects, says Graichen. Dong and EnBW would then be liable for penalties of €48m and €90m respectively. As large state-backed utilities, both could stomach such a loss without too much trouble.

Nevertheless, Dong and EnBW are clearly confident in their calculations.

EnBW says it has developed several power price scenarios, including some that take CO2 prices into consideration, and then came up with an average price scenario for its investment plan.

“If we compare our electricity price assumptions with data from commercial data providers available in the market, then our electricity price expectations are rather conservative,” says Güsewell, echoing similar statements made by Dong.

But experts say that even if the utilities’ calculations prove to be right, the projects might not be very profitable.

“Assuming average wholesale electricity prices of €35/MWh after 2020 and an LCoE of about €31/MWh, EnBW’s He Dreiht may end up with an IRR [internal rate of return] of about 6-7%,” says MAKE analyst Andrea Scassola.

Berlin-based consultancy Energy Brainpool is more optimistic, believing that the utilities could garner an average price of around €53/MWh in 2025 and up to €76/MWh by 2035.

Low costs will pave the way for US offshore wind: Dong

“I find it difficult to believe that people can [make such an investment] unless there is some way their income isn’t dependent on a wholesale market that will fall through the floor every time theirs and other wind fleets generate at the same time,” says Gordon Edge, director of Inflection Point Energy Consulting, who was previously director of policy at RenewableUK. He believes that the utilities and their investors will probably need a greater guarantee that their future income will be sufficient, such as power-purchase agreements (PPAs).

Leupold says Dong will explore whether corporate PPAs are an option for its zero-subsidy projects as a “de-risker”, but the Danish utility has not factored in such deals in its business case.

EnBW is also interested in PPAs, but says it is too early for concrete steps.

“It is, of course, a gamble — on the future of wholesale electricity prices, and on the continued evolution of the technology — but one which these companies are obviously willing to take,” says Global Wind Energy Council (GWEC) secretary-general Steve Sawyer. “And you can be sure they’ve analysed it in great detail.”

Scale and strategy

Dong and EnBW say they have been able to cut costs so dramatically due to economies of scale — they plan to operate these zero-subsidy projects in a cluster with nearby wind farms.

EnBW intends to bundle He Dreith with its nearby 112MW Albatros and 497MW Hohe See projects, creating a 1.5GW operational cluster.

“Not only will the operation be more efficient at this scale. The immediate vicinity of the three projects also makes joint offshore logistics possible, and to that effect one single hotel ship, one control room, one service harbour can be used for considerably more capacity,” Güsewell explains.

Dong points out that its zero-subsidy projects are next to its Borkum Riffgrund 1 & 2 arrays, which means that O&M can be carried out from the company’s existing base at the German port of Norddeich.

Both companies say that there is no cross-financing of their zero-subsidy projects with nearby wind farms that rely on relatively high feed-in tariff support.

“Each project needs to stand on its own feet. The synergies created with other wind farms have to be shared between the two projects,” says Leupold.

The bundling of projects gives the two utilities a competitive advantage, but both say their low bids were not part of a strategic plan to secure as much offshore acreage as possible and discourage competition.

More collaboration needed to keep cutting offshore wind costs

“There was no strategic premium,” Güsewell says. “Under framework conditions we have defined for ourselves, the bid is value-creating.”

Nevertheless, it is quite likely that smaller offshore players such as German developers PNE Wind or WPD will not have the financial stamina to compete against zero-subsidy bids in future tenders.

“It is a very strategic bid to fend off competition and to keep off new entries into offshore wind,” Sydbank analyst Morten Imsgard tells Recharge.

“Dong is very strong [in offshore wind], but a small company on a global scale. They fear that companies such as Shell or Statoil will participate [in offshore wind] big time. For Dong to win strategic projects, they probably needed to go all the way to zero-subsidy, as not all companies can go there.”

Some of Dong and EnBW’s major rivals have made clear that they intend to continue investing in offshore wind.

Holger Gassner, head of markets and political affairs at German utility Innogy, tells Recharge that it is good news that offshore wind in Europe is now cheaper than conventional fossil-fuel generation. But he adds that it will depend on the individual framework conditions of each auction as to whether there will be more zero-subsidy bids in the near future.

“We are convinced that we will be able to hand in competitive bids in future auctions,” he says.

Gunnar Groebler, senior vice-president and head of business area wind at Swedish utility Vattenfall, another major offshore wind player, “absolutely welcomed” the results of Germany’s first offshore auction.

“Since the very start we stated that renewable energies, and thus offshore wind, must ultimately become independent from subsidy schemes,” he tells Recharge.

Grid costs and lifespan

The idiosyncrasies of the German offshore tender system are another reason bids were able to go so low.

Developers in Germany do not pay for the grid link from wind farm to shore — this is provided by transmission system operator TenneT and financed through surcharges on consumers’ electricity bills.

“That certainly makes a difference in Germany if you compare it to the UK auction,” Leupold says.

The length of time between the bid and the expected completion date is also much longer than in other countries, which allows developers to take advantage of the larger turbines and likely higher wholesale power prices in the future, Leupold adds. “The Borssele 1 & 2 project [in the Netherlands], which we have won [with a bid of €72.70/MWh], for instance, has to be delivered by the year 2020-21, and therefore will basically much more reflect the current cost situation. But the German bid reflects the cost situation as we can see it rise over the next couple of years,” he explains.

Developers in Germany are also granted the opportunity to apply for an extension of the lifespan of offshore wind arrays from 25 to 30 years — another cost-cutting element in Leupold’s eyes.

“My only question would be ‘Why only five years?’” he asks. “Why would you want to restrict the lifetime of these assets a priori from a regulating point of view? As long as they are producing clean and reliable power, why would you want to stop them?”